Saturday, October 9, 2010

Can an intangible like a company’s culture make a difference in your business? That is a tough question. After all what is culture? And can it impact your bottom line?

The concept of culture really entered the world of business through Peters and Waterman’s “In Search of Excellence.” They defined it in terms of successful organizations permeated with strong and sustaining systems of beliefs. Later authors have refined this definition to include a company’s character, its deeply entrenched perspective that influences the way that organization develops new ideas, weighs options, and responds to changes in its environment.

Perhaps a simpler way to think about culture is to think of it in terms of how an organization makes choices, how it develops its values, its ethics, how it trains, recognizes and rewards its associates, its spirit, and not to be overlooked, how it treats its customers - both internal and external. In other words culture can be thought of as the ideology of the organization (Mintzberg).

Clearly this concept sounds good, but does it really matter. Given the nature of various industries, both large and small, data on this issue is hard to come by. But are there lessons that can be learned?

The airline industry is one example that comes to mind. Its attractiveness from the point of view of Wall Street is low. Costs for entry and for modernization are high. Competition is high, profitability is low, especially low when compared with some of the new, hot industries such as those burgeoning in the high-tech arenas. In terms of analysts such as Michael Porter of Harvard, the bargaining power of buyers, the customer, is high. The customer has many alternatives, there is low buyer loyalty, decisions by customers are easy to make.

In other words it is hard to be different in this, the airline industry, Yet one company has been able to differentiate itself from all the other airline carriers - Southwest Airlines. And they are so successful they may soon become the largest airline in the US.

Yes Southwest does feature low costs to the consumer and none of the standard frills like meals, travel agents for reservations and baggage connections transfers, but they are also the most efficient with the lowest operating costs in this industry. Their service performance is perceived as extraordinary. Their on time ratings are excellent. They have the fewer complaints filed against them with the FAA then other airlines.

But the thing that most clearly differentiates Southwest from all of their competitors is culture -Southwest is a fun place to work and for many a fun airline to fly. Employee turnover is extraordinary low. Productivity is high - even pilots have helped with luggage and turnaround if needed. There has never been a layoff nor a labor shutdown in their history. Once you have a job with Southwest, it is yours for as long as you want. Lifetime employment is implicit. Employees are involved and empowered and rewarded for their performance and for innovation.

Southwest’s success is based on many things, not the least of which is that it is a place where there are a lot of people who take pride in what they are doing. As noted above this is a fun place to work and that spirit, that culture has made this airline over the past 35 years the most consistent profit performer in this mature and difficult industry.

Are there lessons here? If nothing else, focus on the attitude of your associates, your employees and how they interact not just with your customers but also with each other. What really matters is how you train, trust, treat them - how you recognize them, reward them - how you value them. Not to be ignored is how you lead them. Consider the model your behavior factors into this equation. As Herb Kelleher, former Southwest CEO, noted in a past Wall Street Journal article, “You have to recognize that people are still most important. How you treat them determines how they treat people on the outside.”

My conclusion is, not just for the airlines, but for virtually all businesses, culture counts. After all when you spend your money, don’t you want to do it where you are well treated, where you enjoy yourself, where your expectations are exceeded? And especially where you have fun.

After reading about the importance in books, such as "Built to Last", "Mavericks at Work", and "Delivering Happiness", there's no doubt in my mind that culture is something crucial that companies needs to establish.

This begs the question -- why don't all companies take their cultures as seriously as other aspects of their business? Any thoughts?

Justin,My guess is that they cannot comprehend the impact of culture on the bottom line. Give the short term focus of most businesses they cannot or do not know how to measure/appreciate its benefits. That being said, take a look at the impact of the "balanced scoreboard" concept introduced several years back by some Harvard Business School faculty members Kaplan & Norton. Their latest research should throw more light on this subject.Roger